Sunday, May 06, 2012

Decline in Labor Force Participation Reflects Demographics, May Not Be as Bad as Reported

The data in the top two charts above, courtesy of Zero Hedge (linked at The Drudge Report today with the headline "Labor Force Participation Rate Lowest Since 1981"), have been getting a lot of attention. Here's some recent commentary:

1. Tyler Durden at Zero Hedge: "It is just getting sad now. In April the number of people not in the labor force rose by a whopping 522,000 from 87,897,000 to 88,419,000 (see second chart above). This is the highest on record. The flip side, and the reason why the unemployment dropped to 8.1% is that the labor force participation rate just dipped to a new 30-year low of 64.3% (see top chart above).

2. John Merline at IBD:"In April, the labor force was 365,000 smaller than it was in June 2009 — the month the economic recovery officially started. That's in stark contrast to every other post-World War II expansion, which saw the labor force climb by the millions at this point in their recoveries, even as unemployment rates were driven down. Combined with the growing working-age population, this has pushed the labor force participation rate — those working or looking for a job compared with theworking-age population— down to 63.6% in April from 65.7% in mid-2009, and the lowest since 1981."

3. Wall Street Journal: "The economy turned in another lackluster month for job creation in April, with 115,000 net new jobs, 130,000 in private business (less 15,000 fewer in government). The unemployment rate fell a tick to 8.1%, albeit mainly because the labor force shrank by 342,000. This relates to what is arguably the most troubling trend in the April jobs report, which is the continuing decline in the share of working-age Americans who are in the labor force.

The civilian labor participation rate, as it's known, fell again in April to 63.6%. That's the second decline in a row and the lowest rate since December 1981. That's right—more than 30 years ago, longer than Mark Zuckerberg has been alive. The nearby chart shows the disturbing round trip the workforce participation rate has taken since 1980 and the precipitous drop in the last three years."

MP: Some comments:

1. An important point of clarification: The civilian labor force participation rate (LFPR) as calculated by the BLS is the Civilian Labor Force (employed + unemployed) divided by the Civilian Noninstitutional Population (16 years and over). This can be verified by the current BLS employment report, which calculates the April Labor Force Participation Rate of 63.6% as 154,365 (labor force) DIVIDED BY 242,784,000 (the TOTAL ADULT POPULATION). The total adult population is alternatively referred to as the "working-age population," which can sometimes includes the entire adult population and sometimes includes only those between the ages of 15-64 (see OECD definition here). For the LFPR in the U.S., the calculation does include the entire adult population (including retirees), and not just those in the "working-age" range of 15-64 years old.

2. One reason that the LFPR can be going down over time is that the civilian population can be increasing relative to the labor force, and that's exactly what has been happening to the Male Labor Force Participation Rate, since at least 1948 (see third chart above). From a post-war high of 87.4% in 1949, the male LFPR has been consistently declining and reached a low of 70% in April. Perhaps the decline accelerated in recent years, and the graph would indicate that's the case, but the decline in male LFPR is part of long-term, secular demographic trend that has been going on since the 1940s, and has been declining even during all economic expansions since WWII. Reason? Increasing life expectancy over time will lead to increases in the adult population relative to men in the labor force.

3. As the bottom chart helps illustrate, the dramatic increase in female LFPR from 50% to 60% between 1980 and 2000 more than offset the 2.5% decline in male LFPR during that period, from 77.5% to 75%, causing the overall LFPR to increase. The female LFPR peaked at 60.3% in 2000, and was starting to decline slightly even during the 2002-2007 expansion, again probably because of increased life expectancy leading to greater increases in population relative to the labor force.

4. The third chart also shows that the "sad trend" since 2007 of those counted as "not in the labor force" referred to by Zero Hedge is really just a continuation of a long-term demographic trend going back to at least 1975 (first year BLS has data available). Again, this is probably just a statistical reality resulting from increased life expectancy and an aging population.

Bottom Line: The overall LFPR was in decline after peaking in 2000 reflecting long-term demographic trends even during the expansion of 2002-2007, and probably would have continued to decline even without the Great Recession. Although it's certainly likely that the Great Recession accelerated the decline since 2007, it's important to realize with increased life expectancy, we can expect continued increases over time in those counted as "not in the labor force" and a continuation of the decline in the LFPR that started in 2000.

Additionally, Dr. Perry, this is exactly the trend one would expect in an industrialized nation. You have your growing life expectancy, the need for work decreasing, etc.

There is also the fact of the growing population of folks not part of the labor force such as military, institutionalized folks (schools, prisons, mental facilities), stay-at-home parents, retirees, etc.

Agreed again, but with the proviso that there's more than a little "political influence" being exerted to show unemployment as better than it is.

And the U-7 measure having been discontinued by Clinton shows that it isn't a recent issue... and the BLS' U-6 rate under counts real unemployment due to it dropping off the segment of the long term unemployment after a year (or two?).

If population increases relative to the labor force due to increased life expectancy, then the LFPR would decrease."

The BLS was mandated in 2001 "...to meet the requirement of the State Children's Health Insurance Program (SCHIP) legislation. The SCHIP legislation requires the Census Bureau to improve State estimates of the number of children who live in low-income families and lack health insurance."

The State Children's Health Insurance Program provides federal money to states for low income health insurance. The current Childrens Health Act covers 11million low-income children, and for the "first time spends federal money to cover children and pregnant women who are legal immigrants".

So, the feds want the BLS and Census Bureau to report low-income population more accurately. I think this dramatically increased the official recording of population.

Thus, this might account for some of the fall in participation in the labor force. There is an incentive to account for family members because benefits are increased ~$3000 per child and pregnant mother. More beneficiaries but not more employed are being reported.

We have approximately 40mil retired individuals and growing rapidly. I hear 10,000 a day or ~300,000 each month with baby boomers turning 65. Can this be the cause for much of those who are counted as "dropped out"?

"So, the feds want the BLS and Census Bureau to report low-income population more accurately. I think this dramatically increased the official recording of population."

i see no evidence that this is true.

the us population based on the census POP series does not show any change in either a step function nor in terms of growth rate that i can see in the years post 2001. it's an interesting supposition, and i can see how one might find it worth investigating, but as far as i can tell, the evidence fails to bear it out.

if a significant number of previously unreported/uncounted kids entered the figures, you'd expect a step function jump up or at least a higher population growth rate for a period as the counting took place over time, but i see neither of those things in the POP series.

"Can this be the cause for much of those who are counted as "dropped out"?"

it could, but it isn't.

http://www.qando.net/?p=12967

the rate for over 55's has stayed very stable. the hit is coming elsewhere.

further, if such people were retiring, then generally someone else would fill their job, right?

if you own a company and your bookkeeper retired, all else equal, you'd go hire a new one, right? that would keep the labor participation rate flat.

that would keep the payrolls levels up and the ratio similar unless companies are not hiring, which, from the payrolls numbers, it's clear they are not to any great extent. the current us payrolls number is about the same as it was in 2000.

Do you think that Investors Business Daily would ever report that the net rolls of the Disability Insurance Trust Fund rose from 6.684 billion to 9.296 billion or a gain of 2.612 billion* (39%) during the Bush43 administration? I don't think so, so what's your point?

*The net gain is 1.48 billion (13%) for the Obama administration through April 2012.

"Do you think that Investors Business Daily would ever report that the net rolls of the Disability Insurance Trust Fund rose from 6.684 billion to 9.296 billion or a gain of 2.612 billion* (39%) during the Bush43 administration?"...

Why yes they did marmico and proceeded to debunk thoroughly...

IBD came up with a 21% number if memory serves...

Then again until the Democrats took over both the House and the Senate in 2007 unemployment was pretty low...

If the decline in the labor force participation rate is primarily due to 16-24 year-olds, it's pretty clear this is because increasing portions of these people are attending college. This would jive perfectly with stats showing a surge in student loans the past few years.

And incidentally, if I'm not mistaken, the "echo baby boom" generation is about reaching college age around now. This is a fairly big cohort, so if they're attending college at much greater rates than previous generations, it would explain a lot with what's going on with labor participation.

unknown: "if I'm not mistaken, the "echo baby boom" generation is about reaching college age around now."

The alleged "echo boom" is overstated. From 1952 through 2011, live births in the U.S. exceeded 3.6 million every year - except for the brief ababy bust of the 1970s. There were a few years in the late 1950s-early 1960s where births exceeded 4 million. And then from 1988 until now, live births have remained above 3.9 million.

All in all, the "Boomer" effect has been consistently overstated by those who refuse to look at actual birth data. The so-called bulge in the senior population will be not so much a bulge as it will be a plateau. And that plateau is caused by increased life expectancy.

Job holders 55 and up have risen by 3.9 million — and fallen by 8.1 million among those under 55, Labor Department data show. It’s been 50 months and counting since payrolls peaked, a post-war record. Labor releases the April jobs report on Friday morning.

For the 65-69 and 70-74 groups, the employed shares are up 1.1 percentage points and 1.6 percentage points, respectively, over the past four years.

there was no sudden jump in the number of folks hitting 65 in the last couple years. the huge change since 2008 is simply not demographic in nature. it may take place in the context of a larger trend toward an aging population, but the older folks are increasing wf particion.

further, in a healthy economy, people retiring do not drop the wf participation rate much as those jobs get filled by someone else.

if this were really being driven by retirement, there would be a large number of job openings and the payrolls numbers would not still be 5 million below the peak, but they are. that's a sign that it's lost jobs, not aging population causing this drop.

I used the definition Mark provided above: (employed + unemployed) divided by population, but rtesdtricted both numerator and denominator to those in 16-64 age range. I couldn't find data for years before 2002.

As the WSJ reported, the workforce participation rate has declined significantly since the Bush-era Boom years and even since the pre-Boom years.

One more point about the Boomer/Bust effects: increased immigration in the 1990s offset the 1970s baby bust.

In the 1970s, live births in the U.S. declined to an average of 3.3 million per year. That's 800,000 per year below the Boomer years of 1952-1964.

So, what happened when those 1970s kids reached their 20s? According to the U.S. Immigration Service, the estimated number of annual immigrants to the U.S. had increased by 500,000 since the 1970s. Most of these immigrants were working age. The decline in available workers from the baby bust years was almost entirely offset by increased immigration.

HH: Did the Feds also look at the change in incarceration rate over the same period? The incarceration rate has been stable from 1925-1980. The incarceration rate has tripled since 1980.

I don't think so, don't recall it, but it appears that the raw numbers would be well under a million in the period since 2006 or so when the participation rate started its drop, and therefore not a substantial factor.

I think the table you referenced should look very different than the numbers I provided.

I provided the workforce participation for all the population, ages 16 to 64. The table you referenced includes various segemnts of the population, with no age restrictions.

FYI, the numerator of my figures are from four tables of the Labor Force Statistics from the Current Population Survey:

a. Employed, 16 years and olderb. Unemployed, 16 years and olderc. Employed, 65 years and olderd. Unemployed, 65 years and older

I simply added a and b, then subtracted c and d.

The numerator for my workforce participation figures came from the U.S. Censu Bureau's Intercensal Estimates of the Resident Population by Sex and Age for the United States: April 1, 2000 to July 1, 2010.

"The numerator for my workforce participation figures came from the U.S. Censu Bureau's Intercensal Estimates of the Resident Population by Sex and Age for the United States: April 1, 2000 to July 1, 2010"...

"I do have one theory about the cause for declining workforce participation among work-age population. I think it is caused by enablers"...

I've seen a bit of that myself...

What has really been even more interesting to me (anecdotal of course) is how many people have dropped out of their jobs that they've held for 30+ years because they have refused to move to keep their jobs...

I've not only seen in the airline business but also in the oil business and the accounting business...

juandos: "What has really been even more interesting to me (anecdotal of course) is how many people have dropped out of their jobs that they've held for 30+ years because they have refused to move to keep their jobs..."

Yes, I agree. In some parts of the country, the unemployed may not want to take a big loss on their homes. But that's hardly the case here in Texas, is it?

juandos: "consider taking a look at this from the BLS: Labor Force Statistics from the Current Population Survey..."

Isn't that the data Mark was originally referring to? He argued it was distorted because retirees are included in the denominator. I agree with Mark that including a growing population of retirees could distort the workforce participation stats. That's why I recalculated the statistic using only the 16 to 64 population.

That BLS data did help me after all. The highest workforce percentage of any age group at well over 80% - is the 40 to 54 age populations.

The peak Boomer birth years - the years when births first exceeded 4 million per year - were 1956 to 1964. Those peak Boomers were 36 to 44 in 2000 and 46 to 54 in 2010. So the biggest "bulge" of Boomers moved into and stayed in the highest workforce participation groups in the past decade.

So how can "demographics" explain the overall drop in the labor force participation rate since 2000? When the biggest Boomer bulge moved into the highest workforce participation groups in those years?

Well actually in a few parts of Texas it is the case such as Austin and maybe a little bit in San Antonio but overall you're right jet b...

What I've been seeing personally in the oil business is 30+ year engineers not wanting to relocate to Houston from Corpus Christi or from someplace like Empire, La to New Orleans...

Obviously this sample size if you will is totally meaningless in the big picture but I have to wonder how many other people in other sectors of the economy have made similer decisions for similer reasons?

"Isn't that the data Mark was originally referring to? He argued it was distorted because retirees are included in the denominator"...

I'm not sure jet b, initially I thought it was but I've been having second thoughts on that...

"So how can "demographics" explain the overall drop in the labor force participation rate since 2000? When the biggest Boomer bulge moved into the highest workforce participation groups in those years?"...

Well jet b that's my problem, I don't think demographics can explain the 'whole' situation, the numbers of newly unemployed (relatively speaking) are just to large...

It really does seem like wide swaths of the economy has disappeared or at the very least gone into financial hibernation...